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Capital controls are back in fashion. This column discusses new firm-level evidence from Brazil showing that capital controls segment international financial markets, reduce external financing, and lower firm-level investment. They disproportionately affect small, non-exporting firms, especially those more dependent on external finance. This suggests that macro-finance models focusing on aggregate variables are missing an important dimension by abstracting from firm-level heterogeneity.

Over the past decade, Brazil's future as a leading world economic power appeared certain. An expanding middle class and commodity boom had fueled economic growth, with GDP growth hitting a peak of 7.5% in 2010. However, the high cost of conducting business in Brazil, known as "Custo Brasil," was hurting domestic manufacturing, while incoming foreign investments threatened to overwhelm Brazilian markets. Under President Dilma Rousseff, economic growth stagnated, and the Rousseff administration struggled to find the best balance between reducing inflation, maintaining a flexible exchange rate, and improving the competitiveness of Brazilian exports.

After struggling through the country's longest recession since 2008, the U.K. was expected to grow faster than any other G7 nation in 2014. Analysts wondered whether the return to growth was because, or in spite of, Prime Minister David Cameron's controversial £113 billion austerity plan introduced in 2010. Despite the positive upturn in the economy, U.K. policymakers still faced challenges with rapidly rising income inequality, an economy dominated by the financial sector, a possible housing bubble, and an approaching referendum on Scotland's independence. Moreover, many claimed the U.K. was at risk of secular stagnation, a slowdown in economic growth caused by a structural deficiency in demand. What could the government do to put the country on a sustained and balanced growth trajectory?